Question

The Walton Toy Company manufactures a line of dolls and a sewing kit. Demand for the company’s products is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has provided the following data:

Product	Demand Next year (units)	Selling Price per Unit		Direct Materials		Direct Labor
Debbie	73,000	$	25.00	$	5.00	$	3.50
Trish	65,000	$	6.00	$	1.90	$	1.05
Sarah	58,000	$	32.50	$	9.89	$	5.60
Mike	37,000	$	16.00	$	4.30	$	4.20
Sewing kit	348,000	$	10.30	$	5.50	$	0.70

The following additional information is available:  

The company’s plant has a capacity of 138,550 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.

The direct labor rate of $7 per hour is expected to remain unchanged during the coming year.

Fixed manufacturing costs total $615,000 per year. Variable overhead costs are $2 per direct labor-hour.

All of the company’s nonmanufacturing costs are fixed.

The company’s finished goods inventory is negligible and can be ignored.

Required:

1. How many direct labor hours are used to manufacture one unit of each of the company’s five products?

2. How much variable overhead cost is incurred to manufacture one unit of each of the company’s five products?

3. What is the contribution margin per direct labor-hour for each of the company’s five products?

4. Assuming that direct labor-hours is the company’s constraining resource, what is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?

5. Assuming that the company has made optimal use of its 138,550 direct labor-hours, what is the highest direct labor rate per hour that Walton Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)?

Answer 1

	1)
					Debbie	Trish	Sarah	Mike	Sewing kit
	direct labor cost per unit				3.5	1.05	5.6	4.2	0.7
	direct labor rate per hour				7	7	7	7	7
	direct labor hrs per unit				0.5	0.15	0.8	0.6	0.1
	2)	variable overhead cost incurred
					Debbie	Trish	Sarah	Mike	Sewing kit
	variable overhead cost per hour				2	2	2	2	2
	direct labor hours per unit				0.5	0.15	0.8	0.6	0.1
	variabe overhead cost incurred				1	0.3	1.6	1.2	0.2
	3)	total contribution margin
	Selling price				25	6	32.5	16	10.3
	less:Variable costs
	direct materials				5	1.9	9.89	4.3	5.5
	direct labor				3.5	1.05	5.6	4.2	0.7
	variable overhead				1	0.3	1.6	1.2	0.2
	total variable costs				9.5	3.25	17.09	9.7	6.4
	contribution margin per unit				15.5	2.75	15.41	6.3	3.9
	direct labor hours per unit				0.5	0.15	0.8	0.6	0.1
	contribution margin per hours				31.00	18.33	19.26	10.50	39.00
	Raning				2	4	3	5	1
		demand	CM	total
	product		per uni	contribution
	Debbie	73,000	15.5	1,131,500
	trish	65,000	2.75	178750
	Sarah	58,000	15.41	893780
	mike	37,000	6.3	233100
	sewing kit	348,000	3.9	1357200
	total contribution margin	138		3,794,330
4)			DLH per	estimated	total
	product		unit	sale units	hours
	Debbie		0.5	73,000	36500
	trish		0.15	65,000	9750
	Sarah		0.8	58,000	46400
	mike		0.6	18,500	11,100
	sewing kit		0.1	348,000	34800
	total hours required				138,550
					Allocated	units	contribut	total
					total	produced	per unit	contribution
	product				hours
	Debbie				36,500	73,000	15.5	1131500
	trish				9,750	65,000	2.75	178750
	Sarah				46,400	58,000	15.41	893780
	mike				11,100	18,500	6.3	116550
	sewing kit				34,800	348,000	3.9	1357200
	total hours required				138,550			3677780	answer
5)
	highest price will be		$7direct labor rate +10.50contribution margin per hours
			17.50	answer